Companies relocating to save on wages ruin it for everybody

Posted: June 6, 2012 in Economic Development
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Employment Exhibition

Employment Exhibition (Photo credit: Modern_Language_Center)

The notion of modernity leading to a better life is so ingrained that it is almost mythical. However it’s not inevitable, as citizens of the United States are now learning, and as the Japanese have known for the last two decades. I argue that workers in less prosperous parts of the world face the prospect of being stuck on an even lower rung on the ladder.

The incentive of wages

However sophisticated we think we are, rewards and punishments still work. Even people who are not under economic strain will relocate to less favourable locations, lured by nothing more than a higher salary.

Wages do not even need to be increased to lift performance. Many companies have hit upon the idea of incentivising workers compete against one another for scarce rewards. Samsung, for example, has a practice of firing the worst-performing 5-7% of it’s workforce every year, keeping everyone swimming towards the top like a school of fish fleeing a predator.

Lost knowledge

Human Resources, as a discipline, twigged half a century ago to the inadequacy of behavioural psychology as a basis of motivating employees beyond a certain point and making the most of their contribution. Work (in the developed world) has increasingly been re-structured to meet people’s higher-order needs for self-fulfilment.

Capital mobility is preventing this story from being repeated for workers in developing nations and let me explain why.

Global companies are not in the game of waiting about for the workforce of a particular country to improve their education and skills and start suggesting improvements to processes that would reduce costs and raise productivity. Take the Foxconn factory in Shenzhen for example. iPhones and iPads are basically manufactured by hand because labour is so cheap – cheaper than robots. A hundred years ago manufacturers were strongly geographically situated and over time their workers’ salaries would rise and processes would be improved. Today that’s no longer how it works. As the wages of the workers of Guangdong increase, the companies sourcing their products are simply moving on to lower cost countries, or even lower cost regions still inside China: Vietnam, Cambodia, Bangladesh (no doubt Burma will join that list soon). To stay with the same example, Foxconn is moving to Brazil and Chengdu. Why wouldn’t they? They never had any deep connection with Guangdong in the first place. This is sad in its own right; if only there were more high-ground employers like Alta Gracia or Olam who pay their workers more than the market rate.

There are other hidden costs in this quick fix, as there often are. During this transfer, all of those workers’ learning is lost, and the processes transplanted to the new location are just as inefficient as the original ones. That doesn’t show up in the company’s balance sheet, however, analysts on Wall Street simply rejoice at the new cost saving.

Meanwhile the workers of Guangdong are left to find other occupations. They bring their experiences with them of course but China is not exactly famous for its innovative business culture, so I’m yet to be convinced that workers with manufacturing experience are putting their knowledge to work in more advanced manufacturing in large numbers, selling higher-value products. The Chinese Government has figured this out in the last few years and is trying to push companies in that direction but it’s an open question whether they have what it takes. The country’s slow-moving but comfortably dominant state-owned enterprises are at risk of crushing nimbler private enterprises.

Meanwhile the workers of Cambodia, Vietnam et al are bequeathed senselessly inefficient processes. It’s a lose-lose-lose proposition. The sourcing company doesn’t win either, it merely survives to fight another day. The only winners are its investors and those of its consumers who remain content with cheap or at least cheaply-made goods.

  1. […] Companies relocating to save on wages ruin it for everyone 6 June 2012 Share this:EmailPrintFacebookTwitterLike this:LikeBe the first to like this. […]

  2. […] Companies relocating to save on costs ruin it for everyone 6 June 2012 […]

  3. […] attained the rare victory of union recognition but, after that, their companies invariably relocate. The wonders of Capital Mobility. It makes me think of trying to stop a vacuum cleaner by holding […]

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